February 28, 2019, | AtoZ Markets - In February, the Big Four auditing and consulting firm PwC in Hong Kong published a guide for the insolvent crypto-oriented firms and companies facing bankruptcy. The document addresses the difficulties specific to the emerging industry, in regard to the valuation of assets and operations in several jurisdictions.
PwC believes people need encouragement in dealing with new technology
A Big Four accounting firm has supported various blockchain projects and a year ago announced a blockchain audit service to encourage people to use the new technology. The global auditor recognizes obstacles in the new technology adoption. PwC’s global innovation leader Vicki Huff confirmed that “many compliance teams do not know what to do with technology”. The new PwC service enabled companies to offer an outside review of their blockchain technology to monitor the blockchain’s transactions. Michael Smith, a partner at PwC, who oversees internal audit solutions in one of his latest interviews stated :
“The service provides the need for an independent validation that technology is operating as intended”
While talking about crypto adoption, Henri Arslanian (pictured below), the Asia fintech and crypto leader of PwC Hong Kong, in one of his latest interviews expressed his belief that many more institutional players will penetrate this industry in 2019.
“there’s a lot of exciting things that the crypto ecosystem is looking forward to in 2019.”
He added that 2019 will be different from 2018 because of the rising clarity involving regulatory concerns. In late, 2017 Hong Kong PwC office has accepted Bitcoin (BTC) as payment for its advisory services beginning.
Crypto firms recommended seeking legal and financial assistance
PwC notes in their recently released guide that there are two parameters used to determine a company's financial viability - cash flow and balance sheet.
Cash flow test determines whether the company have the ability to service its debts as and when they fall due. Balance sheet test shows if the company’s assets greater than its liabilities.
The auditor's corporation, however, estimates that in the case of crypto active assets, the volatility of which complicates a clear assessment it is more difficult to establish the aforementioned tests. The company assumes in its document, that “crypto assets with their wide swings in value require extra care when assessing your company’s financial viability.” The PwC Hong Kong division document states:
“The lack of clarity regarding the accounting of crypto actives and the lack of broad consensus on taxonomy in the world of crypto or how to accurately evaluate crypto actives means that ambiguity can arise when assessing the solvency status of your crypto-firm.”
Due to the aforementioned complexities leading digital assets, PwC recommends businesses to seek advice from legal and financial professionals if they are in doubt about their crypto firm’s solvency status.
Improper crypto company leadership might cause civil and criminal penalties
When the company's financial situation is in jeopardy, the auditor notes, the responsibilities of directors shift from serving the best interests of their shareholders to the interests of their creditors, which are becoming paramount.
The document describes the possible loss of management control, civilian penalties, and even criminal charges that the director risks if they cannot properly manage the insolvency proceedings.
PwC warns that in cases where relations between major creditors and directors are broken, “a disgruntled creditor may take compulsory actions to start formal insolvency proceedings and appoint a liquidator.”
PwC states, that a liquidator appointed from outside has the legal right to investigate the conduct of directors, which opens up the possibility of civil - and, less commonly, criminal - actions against them and exposure to personal responsibility.
Debtor-friendly jurisdiction leads to a slight liquidation
Unlike forced liquidation, the auditor claims, the director may retain the opportunity to begin liquidation voluntarily. This is possible in cases of relatively debtor-friendly jurisdiction and can lead to a slight liquidation, says PwC.
The global auditor outlines, that in the case of the aforementioned scenario, the company’s management retains control while restructuring and paying off creditors. PwC specifically addresses firms that operate in several jurisdictions, which, according to the auditor, is a common case in the crypto industry.
With regard to the insolvency case, the document explains that the principle of the Center for Basic Interests is used to determine which laws of jurisdiction prevail.
The PwC Hong Kong bankruptcy guide comes on the background of the latest news regarding the infamous crypto-exchange QuadrigaCX case. Several weeks ago, Atoz Markets covered an article about the sudden death of Gerald Cotten (pictured below), a 30-year-old founder of the Canadian crypto-exchange, that turned into serious financial difficulties for QuadrigaCX customers.
At the moment the company is at the center of litigation and disputes as allegedly deprived the company of access to most of its cryptocurrency.
The widow and co-founder of the actual founder of this week asked the court to appoint the main restructuring agent for adoption case decisions, citing her lack of experience with the insolvent company and unwanted public attention to the case, which attracted her personally.
Well-established firms could bring credibility to crypto space
AtoZ Markets team contacted Writer/Editor at NIAID and author of Consensusland: A Cryptocurrency Utopia Mark Helfman to know his opinion on PwC initiative.
“It’s good that a well-established auditing firm is thinking about these issues in a constructive way. This brings credibility to space. Business leaders know what they need to think about and understand that if they screw up, somebody can hold them to account. Investors, partners, and lenders know what they can do to recover losses. That’s not a bad thing per se. I’d be surprised if this one document changes the landscape of the cryptocurrency industry, but you never know,” says Helfman.
While answering the question of whether PwC guide will help crypto projects that facing difficulties in the market to recover, the NIAID writer noted :
“Maybe but often the difficulties aren’t legal, they’re financial and/or operational. Many businesses face financial challenges, many fail, regardless of whether they have clear guidance. Guidance isn’t law, and this particular document offers advice, not instruction.”
“Industry leaders need clear expectations and responsible guidance. For those who want to do the right thing, this assures them they're acting appropriately. For bad actors, this holds them accountable. The legal remedy is still based on the laws and customs of whatever jurisdiction these businesses operate from, not PwC’s guidance. Failure is common in business, as are lawsuits, risks, and losses. This is not unique to cryptocurrency and not in itself a way to assess whether cryptocurrency is doomed, “ the author of Consensusland: A Cryptocurrency Utopia added.
We asked Mark Halfman will PwC guide offered penalties encourage industry leaders to do their business better? NIAID writer answered the following:
“I consulted for some start-up execs earlier this decade and got to know a few people in that space. I've also recently met some CEOs and leaders within the crypto space. If these people represent the types of people running cryptocurrency businesses in general, penalties won't matter, these guys aren't thinking about what happens if they fail. It’s just not their mindset. They want to succeed. However, clear penalties will help their lawyers and accountants provide good advice on the risks and consequences of their actions. It will also help their teams know whether their executives are people they can trust. And, it helps investors and creditors screen leaders or projects and will clarify what happens to their investments when the businesses go bad. And, certainly, some businesses will improve their cultures or behaviors based on guidance. IMO this is good, healthy, and beneficial, even if you or I might disagree whether the actual guidelines are "good" or "bad."